A firm will spend to produce.  This is the firm’s cost.  They must spend money, but money costs are different from opportunity cost.  Opportunity cost refers to the alternative forgone.  The firms could have produced something else, but they didn’t.  The firms passed up this opportunity.  They may have anticipated a higher return.  They may have a psychic profit from producing one thing and not another. 

Money cost and opportunity cost are different.  Say, a firm has two options.  One yields more than the other.  The firm can only do one, not both, so they must pick one.  It’s likely they will pick the one that yields the greatest income.  Now, the lower income may yield a higher psychic profit.  They might choose that one if that’s the case.  All being equal, the firm will choose the endeavor that yields the highest income.

The individual will act based on the comparisons of the opportunities.  If the individual has two job opportunities, he will choose the better of the options.  He’s trading one opportunity for another.  The choice is based on his subjective valuations.  He will choose to maximize his profits, money, and psychic gains.  He can be wrong, just like a firm can be wrong.  Nobody can predict the future.  This choice will be made by anticipation.

Opportunity cost might seem obvious for the firm and individual.  However, based on conditions, resources can be shifted from work to idleness.  A rise in taxes will do this.  The firm may decide not to invest if they don’t anticipate a return.  It’s the same with the individual.  The individual may decide not to work, or pick the lesser of two opportunities because he’s in a lower tax bracket.  Less wealth is created.

Cost is not just what you pay for the inputs.  Firms and individuals must choose between the opportunities.  They must exchange one opportunity for another.  Given that there are multiple opportunities, resources could be shifted from work to idleness.  Various conditions may cause firms and individuals to remain idle.  The firm can decide not to save and invest.  The individual can decide to stay home.  We are all worse off.

Reference

Murray Rothbard; Man, Economy, and State